Insurance: Life and death decisions

We’re an underinsured nation. A recent study by Massey University for the Financial Services Council found we have the third-lowest uptake of life and trauma insurance among 31 OECD countries.

It probably doesn’t seem like it when it’s time to pay the premiums. We’re not talking about policies relating to property (such as house, car, contents or other “toys”), medical/ health insurance or any cover paid by a business manager, such as public liability or director indemnity.

Cynical people will say it’s not surprising for the council to be highlighting underinsurance, as it’s the main industry body and in the business of encouraging people to spend more on its services.

It caught my eye when my partner was offered a new death or trauma policy – for which I would be the beneficiary. My initial reaction was why spend the not-inconsiderable sum, but on second thoughts, it made sense given our ages and business involvements.

In addition, awareness of mortality heightens as we age, and the recent deaths of several high-profile people in their sixties underlines that not everyone lives healthily until they’re 90.

Imagine what life would be like if you lost your main income because you or your partner became incapacitated. The study found more than half of households would have a drop in consumption of more than 40% if the main earner died.

But it’s a question of value for money and risk/return. Do you think the premium is worth the potential benefit?

I’ve always avoided life insurance. I don’t have dependants and I found it confusing when life insurance was promoted as an investment: you signed up, often at a young age, and could cash in the policy 10-40 years later, such as when buying your first house or at retirement.

As a result of high fees and inflation, insurance policies held by friends and family produced disappointing returns. But there weren’t many other options when there were restrictions on investing overseas, a less-developed finance industry, fewer investment funds, etc.

Despite the study’s self-interest, it’s worth thinking about whether you’d be okay if the worst happened – either through death or permanent trauma.

Insurance is usually bought by the main income earner to look after his or her family in the event that death or disability permanently prevents further earning. The study says the personal disability and income protection area is where we are most underinsured.

There’s a theory that many of us are in this position partly because we don’t want to think about the possibility of bad things happening. Or buying the insurance is on our must-do-sometime list, along with updating our will, visiting Great Aunt Nora and going on a diet. Somehow we just don’t get around to it.

One of the more interesting findings was how women are poorly tuned in to the need for insurance – even when they are the sole or main family earner. That’s a worry, as many women are responsible for providing for their families. The trouble is a high proportion of sole-parent families struggle to pay food and housing costs, let alone think about the what-ifs.

However, don’t assume the state will look after you. Accident compensation is what it says it is and qualifying for payments is getting increasingly difficult. Statistics show not being able to earn as a result of illness is far more likely than through accident or death.

The study found the industry has failed to keep up with the interests and needs of modern families as the traditional mum, dad and two kids grouping becomes less common. If the industry wants to encourage people to take out insurance, it needs to cater to new-style families. It should also make options easier to understand and help people evaluate choices.

Finally, it needs to give people trigger points to make them get started on their priority list. On that basis, linking offers to mortgage options would be smart.